On Dec. 20, the People’s Bank Of China (PBOC) announced a five-basis point cut in its one-year Loan Prime Rate (LPR), taking it from 3.85 percent to 3.80 percent. Though the rate cut is small, it is the first such reduction in LPR since Aug. 2020. The LPR is decided by 18 banks.
The five-year LPR was kept intact at 4.65 percent. Most new and outstanding loans in China are based on the rate of the one-year LPR. The price of home mortgages is influenced by the five-year LPR. Since 2019, the LPR has been looked upon as China’s benchmark funding cost.
Last week, China Finance 40 Forum, an influential Chinese think-tank, had urged policymakers to cut down interest rates and boost investment in infrastructure to make sure the country’s economy grows by at least five percent next year. China’s fourth-quarter GDP growth is expected to drop below 4 percent this year, far below the 18.3 percent growth in the first quarter.
“[The] cut will immediately feed through to outstanding floating rate business loans and should also lead to cheaper loans for new fixed-rate borrowers… We expect a cut to the five-year LPR before long which will make mortgages slightly cheaper and help official efforts support housing demand. The PBOC has already pushed banks to increase the volume of mortgage lending,” Mark Williams, chief Asia economist at Capital Economics, told SCMP. He expects a 45-basis point cut to the one-year LPR next year.
Last week, PBOC announced that it will reduce the reserve requirement ratio (RRR) for commercial banks by 0.5 percentage points. This was expected to pump in 1.2 trillion yuan ($188 billion) worth of liquidity into the interbank system and boost the economy. The LPR cut is expected to result in higher consumer spending and investment as it can cut down the borrowing costs for households and companies.
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After the COVID-19 outbreak, China was one of the first major economies to bounce back from the coronavirus-triggered economic decline. But from the latter half of this year, economic growth has seriously lagged. In addition to the real estate and power crises, communist China’s growth is also said to have been affected by Beijing’s strict zero-tolerance policy on COVID-19 that led to widespread industrial shutdowns in many places.
“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” Zhaopeng Xing, senior China strategist at ANZ, said in a research note. However, he pointed out that Beijing’s decision to keep the five-year LPR unchanged showed that the Chinese regime chose to not use the property sector as a stimulant for economic growth.